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Senate grills Bernanke

By Claes Bell · Bankrate.com
Tuesday, July 17, 2012
Posted: 3 pm ET

You have to hope that Federal Reserve Chairman Ben Bernanke isn't the type of person who gets annoyed about repeating himself. Much of his testimony at the Senate Banking Committee Tuesday reprised statements he made at a recent press conference.

But Bernanke did drop some hints about possible Fed actions, including another round of quantitative easing, where the Fed buys massive amounts of Treasuries and mortgage-backed securities to push down interest rates in the open market. Here's Bernanke responding to a question from Banking Committee chairman Tim Johnson (D-S.D.) about possible future policy changes.

We are looking very carefully at the economy trying to judge whether or not the loss of momentum we've seen recently is enduring and whether or not the economy is likely to make more progress toward lower unemployment and more satisfactory labor market conditions.

If that does not occur, obviously we have to consider additional steps. We've looked at a range of possible tools, mostly involving the balance sheet and communication. The (Federal Open Market Committee) meets in a couple of weeks and we'll be discussing those tools. We haven't really come to a specific choice at this point, but we are looking for ways to address the weakness in the economy should more action be needed to promote a sustained recovery in the labor market.

Federal Reserve chairmen are famously reluctant to tip their hands on future policy actions, but Bernanke doesn't sound like a man who's planning to start another massive quantitative easing effort in two weeks. It appears Bernanke and the FOMC are still on the fence a little bit about whether the weak economic numbers of the last few months are temporary, or part of a long-term trend toward slowing growth and further economic stagnation.

Bernanke repeated many of the observations about the economy he expressed in the downbeat press conference the Fed held last month. Here are some of the highlights from the rest of his testimony:

  • Unemployment remains stubbornly high, with job growth slowing to 75,000 per month in the 2nd quarter, down from 200,000 in the 1st quarter of this year.
  • The European debt crisis remains a big risk factor to the U.S. economy. Bernanke said he was confident European leaders have the tools and motivation to resolve the crisis without a financial crash. But what else could he say, really, without causing a stock-market nosedive?
  • The huge amount of money that will be sucked out of the U.S. economy by the combination of expiring tax cuts and automatic federal budget cuts pose a major threat to the recovery, Bernanke said. If it takes place, the so-called "fiscal cliff" would result in 1.25 million fewer jobs being created in 2013.
  • The housing market is finally starting to show signs of life, with housing prices rising slightly in the last few months and apartment construction picking up.

Bernanke also was asked about the Federal Reserve's response to alleged manipulation of the London Interbank Offered Rate, or Libor, by many of the world's largest banks. Bernanke largely laid responsibility for the scandal at the feet of Libor's publisher, the British Bankers Association, which he said failed to adopt many of the reforms offered by Fed officials after some details of manipulation came to light in 2008. When asked by Sen. Pat Toomey (R-Pa.) why the Fed didn't do more to prevent the manipulation by, he replied, "The Federal Reserve has no ability to change it."

So what do you think? Should the Fed step in and launch more quantitative easing to speed up the recovery? Should the Fed have done more stop Libor manipulation?

Leave a comment below or hit me on Twitter: @ClaesBell.

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